Our Barometer Reading is composed of three metrics: (1) the 10-year/2-year yield curve ratio; (2) an equal-weight average of 3 yield curve ratios, comprising the 20-year/10-year, the 10-year/3-month, and the 5-year/2-year maturity comparisons; and (3) an equal-weight average of 12 yield curve ratios.
In order to trigger the eResearch Count-Down to an Economic Recession in the USA, the 10-year/2-year ratio MUST be inverted, and 2 of 3 metrics (10/2, 3-ratio, and 12-ratio) MUST be inverted, and the Combined Reading MUST be inverted.
Barometer Reading of 8.0x
The 10/2 ratio last week rose slightly from 0.12x to 0.13x. However, the 3-ratio reading rose from 0.01x to 0.11x, and the 12-ratio reading rose from 0.02x to 0.11x. As a result, the Combined Reading rose last week from 0.05x to the current 0.12x, which translates into a Barometer Reading of 8.0x.
The following table shows the three metrics, with their respective Spreads and Readings, since the beginning of August. The table shows that there was a three-week period when the 3-ratio Spread, the 12-ratio Spread, and the Combined ratio Spread were all negative.
However, in order to trigger our Count-Down initiative, the metric that was missing an inverted ratio was the key 10-year/2-year yield curve ratio. Unless this metric is negative, our Count-Down does not start.
USA-China Trade Negotiations
The progress in the USA-China trade negotiations seems to have been the catalyst for rising yields (falling bond prices) in the final two trading days last week. There needs to be some follow-through with other positive economic and/or political announcements to keep the ratio readings from falling back down again.
In the meantime, the increased Spreads across almost all of the interest rate maturities have taken a lot of pressure off the near-term possibility of the USA going on Recession Watch.
You can read our comprehensive report by clicking the following link: Recession Barometer 2019-10-11
